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Women’s “All Weather” Retirement

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Retirement for women is different than for men, and unless this fact is recognized and acknowledged, a woman’s retirement may become something less than golden.  A question for the women out there: how well do you know your finances? Whether you’re single, married, widowed, or divorced, planning for retirement can be tough.  Women live about five years longer than men on average, which means planning is key.

Retirement should allow you to spend the rest of your life in peace, provided that you have saved a considerable amount of money for your post retirement expenses.  The big disadvantage for women is a financial one, they’re more likely to be poorer than men. Although they’re more likely than their mother’s generation to have had jobs, they’re still more likely than men to spend their retirement in poverty.

There are a couple of other things that contribute to women’s potential for poverty in retirement. In addition to women generally earning less than men over the course of their lifetimes, they live longer, retirement, for some, can last 30+ years.  So any money they’ve managed to accumulate has to last them longer.

The risk of outliving assets is greater for women than men.  But that’s just the tip of the iceberg when it comes to women, where the problem is especially acute.  As a result, women typically have about 1/3 less money set aside for retirement than men.

Women are more likely to be well-educated, less likely to lose their jobs in the recession, and more likely to look after their health by eating their five daily fruit and veggies and by visiting their doctor when they first start noticing symptoms. In contrast, men don’t live as long as women, they’re more likely to be overweight and they’re three times more likely to take their own lives – presumably because they don’t have those supportive networks to turn to.

There are several reasons for this poverty and they’re all to do with being female:  Women STILL make less money than men over the course of their working lifetimes, and they don’t get as many promotions as men do. Women are more likely to have worked in low-paid jobs or to have worked part-time.  Less than half of wage-earning women in the US participate in retirement plans. To review -

  1. Women live longer than men.
  2. Women, on average, work in jobs that earn less than men – causing an earnings gender gap.
  3. Women (more often than men) interrupt their careers to care for children, aging parents and grandchildren.

In addition to all that, women are more likely to have had time out of the workplace due to raising children or looking after elderly parents, so they have fewer years to build up their retirement savings. At the same time, during that time that they are out of the workplace, they’re also losing out on years of paying into a pension plan – and if that comes with an employer contribution, they’re missing out on the employer’s contribution too.

There are various tools in our kits to help create “water-tight” financial plans to address the retirement funding gap.   Based on the longevity of women, it is certainly in everyone’s best interests to provide sufficient sources of income to carry us comfortably through our seventies, eighties, nineties, and even beyond. The question is, how?

To answer that challenge we suggest placing a portion of the nest egg into an investment portfolio composed of what we call a “All Weather” account that will provide a monthly income designed to pay the income amount required for her lifetime.  Why an income annuity? Because it is the only investment I am aware of that will pay a lifetime income, no matter how long the recipient may live.

Annuities are “the only way to generate retirement income that cannot be outlived.   Women will feel more confident in their retirement plans if they know that their basic expenses will be covered by guaranteed income. Therefore, any retirement-planning conversation should include a discussion of strategies for generating lifetime income, and how annuities can help create financial security no matter what the weather is.

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Thursday, February 26th, 2015 Wealth Management Comments Off

Win The Retirement Income Bet

How long a individual can actually expect to live in retirement, and the financial requirements to do so at the standard they want, is a fundamental consideration.  A healthy nest egg is anywhere from six to 20 times your ending salary at the time of retirement, depending on your age when you retire and the proportion of your working income you want to have available each year.

Savers want income guarantees with their pensions.  Yet, everyone is against annuities, but when you ask people with funds in their retirement what they would like without using the word annuity, they will describe various features of annuities to you. With an income annuity, you pay a lump sum to an insurance company in exchange for a payment that lasts as long as you live. It’s like buying a traditional, old-fashioned pension plan.

One of the most common questions we get from people about to retire is how to turn their retirement savings into retirement income. After all, for most of our life, retirement planning is about accumulating a nest egg. What to do with that nest egg when we actually retire is a whole different ball game.  Once it comes out of the plan, individuals are often on their own.”

Managing money without expertise is no different than trying to do what you did for a living without training, experience and know-how. Money management is complicated, constantly changing, involves numerous options and requires years of study to be good at it.  We make decisions every single day. Some are simple, others are more complex.

When people retire, they depend on their 401(k) assets for their retirement security.  The vast majority of American households don’t know enough about the asset management industry to make sophisticated choices in the 401 (k) plans, 403(b) plans and individual retirement account markets. They are ripe for ripoffs, and that gets more likely as they age.”

When you prepare to retire, you have the option to roll your 401(k) into an IRA, and not every financial professional offering advice about that is required to act entirely in your best interest. Investment advisors are required to follow that principle, known as the fiduciary standard. But brokers are only required to recommend “suitable” investments.

The difference between “fiduciary standard” and “suitable” seems arcane. But it means a broker can advise you to put money in a high-cost or low-performing fund or account, even when a better option is available, as long the recommendation is suitable. The recommendation does not have to be in your absolute best interest.

The difference has wound up costing investors between $8 billion and $17 billion annually in high fees or sub-optimal investment performance.  “When you get bad advice, you are paying for it. Boomers really haven’t been exposed to money management in retirement.  We’ve been taught about markets, funds, derivatives and all kinds of fancy accumulation schemes while we don’t actually need our money, but nothing about how to make our money last when we do need it.

Fewer than half of boomers will have a pension. Defined benefit pension plans are an endangered species, in spite of the fact that they are the most reliable guarantee of post-retirement income. When today’s employers offer any retirement plan at all, it’s more likely to be a 401(k) or an IRA, and the amount saved is unlikely to last as long as it’s needed.

Individual investors seem sold on the notion that they need to grow their portfolio, but they still need to be educated on the importance of safeguarding their assets from unnecessary risk.  Retirees who are focused solely on growing their assets are ignoring the potential risks to their current earnings capacity and their future income stream, and this can put their entire financial strategy in jeopardy.

Some of your decisions will be so routine that you make them without giving them much thought. But difficult or challenging decisions demand more consideration. These are the sort of decisions that involve:

  • Uncertainty – Many of the facts may be unknown.
  • Complexity – There can be many, interrelated factors to consider.
  • High-risk consequences – The impact of the decision may be significant.
  • Alternatives – There may be various alternatives, each with its own set of uncertainties and consequences.

When you’re making a decision that involves complex issues like these, you also need to engage your problem-solving, as well as decision-making skills.  With all the effort and hard work you’ve already invested in evaluating and selecting alternatives, it can be tempting to forge ahead at this stage. But now, more than ever, is the time to “sense check” your decision.

After all, hindsight is great for identifying why things have gone wrong, but it’s far better to prevent mistakes from happening in the first place!  Your final decision is only as good as the facts and research you used to make it. Make sure your information is trustworthy, and that you’ve done your best not to “cherry pick” data.

Couple this with the fact that Americans are living longer and the risks are even greater. The problem stems from the fact that while 50 percent of people will live beyond average life expectancy, 50 percent will live less. That means many people who spend less to save for later simply end up cheating themselves out of the higher quality of life they could have afforded. On the other side, many people assume wrongly they will die sooner, spending too much in the earlier years and then facing poverty in later life.

That’s the bet – that you live too long, or said another way, you live longer than your money does. Win the bet by actually giving the insurance company an amount of money, and it will guarantee you a lifetime income for as long as you live. That’s what an income annuity is — an insurance policy that guarantees your money will live as long as you do.

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Wednesday, February 25th, 2015 Wealth Management Comments Off

Safe Withdrawal of Retirement Nest Egg

Building up a solid nest egg is only half the battle. Equally important, and perhaps even more complicated, is figuring out how to safely withdraw money from those savings. You may also be confronting a savings gap as your retirement draws near, making your drawdown strategy that much more important.

The secret to successful planning is to create a model with multiple strategies that can be activated over time in order to maximize income, reduce risk, minimize taxes, offset the savings of inflation and create a “shock absorber” for unforeseen events like negative markets, loss of principal, medical expenses and long-term illnesses.

While uncertainties are logically unplanned, one thing they always are is inevitable.  When you retire, you don’t have to worry about a job loss anymore but cars and roofs can still need repair in retirement. Be aware that accidents, major home or car repairs and other uncertainties will still loom on the horizon once you retire.  Things will crop up. When they do, it’s best to be prepared.  Remember that emergency funds aren’t just for the young.

When you are retired, you don’t want to have to sell investments at a loss or have to go into debt to pay for them.  The stock and bond market go through cycles of times when prices rise and periods where prices decline. Knowing this, one might assume the average investor is taking steps to become safer with their investments now that the equity market is at or close to an all time high.

Sadly, it is a world where the two primary asset classes stateside — U.S. stocks and U.S. bonds — are extremely overvalued. And yet, the choices of how to manage the overvaluation in one’s portfolio are not particularly attractive either. Since there are no meaningful risk-free rates of return in a zero percent interest rate environment, investors have been choosing between risky and riskier alternatives.

Yet, in our experience lately, some investors are instead falling into the same pattern of the past, and instead increasing their risk to try and earn more returns like the markets.  An investor who wants “market” returns must also be willing to accept “market” losses.

When it comes to paying your bills in retirement, it doesn’t really matter if you use an “income” dollar paid via dividends or interest or whether you use a “capital gains” dollar from the sale of stock. At the end of the day, a dollar is a dollar.

Planning your retirement is no walk in the park. One of the most common questions from people about to retire is how to turn their retirement savings into retirement income. After all, for most of our life, retirement planning is about accumulating a nest egg. What to do with that nest egg when we actually retire is a whole different ball game.

Make sure your income lasts as long as you do.  Take your expenses per year and then subtract that from your projected annual Social Security income and any pension income you expect to receive, and then divide the result by your remaining retirement savings.

If the number is above 4%, you face a considerable risk of outliving your money so you may want to consider purchasing an income annuity. With an income annuity, you pay a lump sum to an insurance company in exchange for a payment that lasts as long as you live.

It’s like buying a traditional, old-fashioned pension plan. However, you generally give up the ability to access your lump sum (that’s why you need emergency savings) or pass it on to heirs (although you can get one that pays for a minimum number of years or add a survivor who will get all or a portion of your payments until they pass away).

As a general rule, use income dollars for personal expenses to avoid selling shares. In a prolonged bear market, selling your shares can be akin to a farmer eating his seed capital. Shares sold at depressed prices are shares that won’t grow in value when the market turns around.

I want you to imagine the PERFECT place to put your Retirement Funds.  First, you would want something that offered you a good rate of return.  Second, you would want something that would never lose money. Third, you would want something that could provide you with income for your retirement.

An annuity in its most simple form is a contract between you and an insurance company.  The contract is the yen, to Life Insurance’s Yang.  Where Life Insurance was designed to protect you from living to little, the annuity was designed to protect you from living too long.

No two annuities are the same. They come with different features and benefits, which only YOU can decide are either right for you or not. A partial listing would include: individual annuities, immediate annuities, deferred annuities, single premium or installment premiums, fixed annuities and variable annuities.   (We do not recommend Variable Annuities as the fees are way too high.)

The list goes on. In this case, variety is a good thing for you as the consumer because you can fine-tune your annuity to get it just the way you want.

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Saturday, February 21st, 2015 Wealth Distribution, Wealth Management Comments Off

Preserving Financial Resources

As traditional pension plans become extremely rare and life expectancy increases, one of the biggest sources of retirement insecurity is outliving your money. Statistically, an average 65-year-old male will live to be 84, while the average female will reach 86. These are average statistics. That means one half will live even longer so you have to cover for roughly 20 to 30 years after retirement.

Retirement planning is probably the only aspect of life in which longevity is considered a risk, and in this context, the risk is that you get the timing wrong by spending your last dollar long before you die. You can reasonably budget for living expenses, but longevity and health care costs are wild cards.

No matter how well you invest up until the point that you retire, you can still have a less than satisfactory retirement if you don’t handle your money well.   Those who live a long time after going broke may very well regret pursuing a strategy designed to destroy — rather than build — their wealth.

Most retirement planning strategies are centered on trying to preserve financial resources for as long as possible.  One of the problems with spending all your resources before you die is that you don’t know how long you are going to have to live with the decision.

That’s where deferred income annuities come in. They’re a valuable tool for creating an income distribution program that is very similar to now-scarce defined benefit pensions, traditional plans that paid you a fixed amount based on your salary. With a deferred income annuity you can preserve your investment capital and make sure that you have a steady income for the rest of your life — no matter how long you live.

As bond yields, savings account rates, CD rates and other traditional sources of income have plunged toward zero, retirees have seen the ability of their assets to generate income all but disappear. This exacerbates the risk of spending your money too quickly, because with low bank rates it will take more savings to generate the returns you need.

While investment in the stock market is considered to be a capital investment in our productive economy, it very seldom is. If you are able to purchase new stock directly from a corporation that will use that money to expand their productive capacity, then you are investing capital in our economy.

But when a stock is sold the second, third and so on… times, the new owner is not investing in that corporation. The vast majority of stock trades are done between one investor-speculator and another, trading places between would-be owners and those who would rather not be owners.

As far as our productive economy is concerned, these dollars serve no useful purpose. They create no jobs, build no factories, nor do they feed or shelter anyone, except stockbrokers and speculators. The taxes paid on gains are offset by the deductions taken on losses.

The following generation will be too small in population and earning capacity to bid up prices and produce a profit for the boomers to retire on.  The generations following the Boomers are going to have their income taxed heavily to pay the Social Security and Medicare for the Boomers and thereby will not have the pocket money to buy into IRA’s and 401K’s; causing those markets to fall catastrophically in value and bankrupt many Boomers.

Consider also that most 401K plans are not invested in industrial stocks and bonds; rather they are only speculating on the profitability of a mutual fund company, i.e., the stock you own and will need to sell at a higher price to have retirement income is your investment firm’s stock, and no other. Since your fund managers must buy and sell stocks and bonds, etc. to make a profit, similar to all other mutual funds, you can only come out a winner if other 401K speculators come out losers.

The Boomers will either suffer losses that will destroy the value of their retirement investments, or they may be forced to keep their capital tied up in owning stocks and bonds and only receive relatively small dividends, without ever being able to recover and spend their invested capital.

The cover-your-basics retirement income approach aims to match your fixed expenses with fixed sources of income. Retirees should use an income annuity to cover any gap. Purchasing an annuity’s fixed income option gives you peace of mind, knowing your lifestyle will be relatively stable and not depend on the whims of an inherently volatile market. Life annuities remove the uncertainty of living a very long time (longevity risk).

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Thursday, February 19th, 2015 Wealth Preservation Comments Off

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